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Why Dole Food Shares Went Bad

Is this meaningful? Or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Dole Food (UNKNOWN:UNKNOWN) missed out on the broad-market rally today, falling as much as 17% after updating guidance because of the sale of its worldwide packaged food and Asia fresh businesses for $1.685 billion in cash.

So what: Itochu, a Japanese company, is awaiting regulatory approval before it can complete the acquisition. Dole has been heavily indebted, with nearly $1.7 billion in borrowings on its books, and the sale, along with other contingent credit agreements, will go toward extinguishing that debt and giving the food supplier more financial flexibility in a variety of areas. Perhaps more importantly, new COO Michael Carter provided updated guidance, saying the company expects net income of $45 million to $60 million in 2013, below market expectations. Management also called the current banana market "challenging."

Now what: Today's fall probably has more to do with the scaled-back guidance rather than the news of the sale's completion, which shareholders had approved a month ago and included the departure of Dole's CEO, David DeLorenzo, for Itochu. In total, the sale should cost Dole at least a quarter of its revenue, which doesn't seem like a terrible deal for a price tag double its market cap. The packaged-food segment contributed about a third earnings, however, so the sale removes more than 40% of the company's net income. The new "right-sized" Dole should be a nimbler competitor with the debt off its books, but I see no compelling reason to invest, especially with the loss of the packaged-goods segment, which has higher margins and greater growth potential. You can find out what's next for Dole by adding the stock to your Watchlist here.

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